Company Reports

We transfer five Japanese banks to a new coverage analyst with minor tweaks to our earnings forecasts that do not change our fair value estimates for the Tokyo-listed shares. Our fair value estimates for Mitsubishi UFJ Financial Group's, or MUFG, and Mizuho Financial Group's ADRs rise by 9% each to $12.25 and $4.61, respectively, due to 9% appreciation in the Japanese yen against the US dollar.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot greatly expand lending abroad to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

Since Aug. 31, share prices of the Japanese banks we cover have fallen by 24% to 29%, making them appear undervalued. Just a week earlier, these banks seemed fairly valued or even overvalued according to our intrinsic value estimates. If the Federal Reserve aggressively cuts US dollar interest rates, it could diminish expectations for future increases in Japanese yen interest rates—despite recent hawkish comments by Bank of Japan Gov. Kazuo Ueda. This shift might prompt a reassessment of Japanese banks' earnings trajectory. We will review our forecasts after meeting with the banks in Tokyo and observing the Fed’s stance in the coming weeks.

We raise our fair value estimate for Resona to JPY 975 from JPY 890 following the release of fiscal 2023 earnings that were largely in line with a higher share buyback forecast in the coming years. We are more optimistic than Resona's management in our margin outlook for the banking group as near-term higher-for-longer United States interest rates and Japan's exit from net-zero interest rates point to room for interest margins to expand. We maintain our assumptions, and our net profit forecast is little changed. The share buyback of up to 30 million shares equates to around 1.29% of Resona's share base.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot greatly expand lending abroad to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

The Bank of Japan, or BoJ, officially ended its net zero interest rate policy March 19 in a move that was well anticipated. The BoJ now guides the overnight call rate at 0% to 0.1% and will also no longer cap the 10-year Japanese government bond rate at 1%. Rather successfully for the BoJ, the announcement resulted in little reaction from the markets. What the move means is that the Japanese banks are earning a positive return on their reserves. We think this shift is already baked into the share prices of the banks we cover. For investors holding for the longer term, our preference would be for Sumitomo Mitsui Financial Group, or SMFG, and Resona, but we would prefer to wait for more attractive entry points. We think Mitsubishi UFJ and Mizuho are slightly overvalued and may not benefit as much as their expanding domestic net interest margins, or NIM, may be partly offset by margin pressure on their relatively significant international operations.

Resona's December-quarter net profit disappointed somewhat as its net interest margin, or NIM, fell short of our expectations. We lower our fiscal 2023 ending March net profit forecast by 8% to JPY 153 billion, which is in line with Resona's unchanged guidance of JPY 150 billion. However, we leave other assumptions unchanged, resulting in minimal impact to our post-fiscal 2023 profit forecasts and maintain our JPY 890 fair value estimate. Resona's share price slipped in early reaction but we see this as temporary and we remain buyers. We continue to expect NIM to expand in the coming years.

We’re maintaining our fair value estimates for Japanese banks following the central bank's decision not to adjust monetary policy in its final 2023 meeting.

We maintain our fair-value estimate of JPY 890 for Resona Holdings, 13% above the current price and 0.81 times book value as of September 2023 (0.87 times including unrealized losses on held-to-maturity securities). In contrast to the Japanese megabanks, which have big overseas operations and more diversified revenue from nonbank businesses, Resona’s reliance on domestic net interest income means its earnings outlook and share price depend to an even larger degree on the future path of yen interest rates. While we think Japanese bank share prices overall are in line with where we calculate intrinsic value given our outlook for only a gradual normalization in the Bank of Japan’s monetary policy, for Resona there is slight upside following the sectorwide correction since September.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot greatly expand lending abroad to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot greatly expand lending abroad to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

We increase our fair value estimates for Japanese banks after the Bank of Japan's decision last week to make the operation of its yield curve control policy more flexible. The yield on 10-year Japanese government bonds, or JGBs, has risen as far as 0.625% today after the central bank redesignated its previous 0.5% hard upper limit as a mere reference value and said it will now conduct purchase operations to maintain the level at its discretion rather than automatically in unlimited size. This affects our fair value calculations for Japanese banks, as we believe it changes the outlook for yen interest rates and credit costs in future years, though we do not expect much impact on earnings in the fiscal year ending March 2024.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

The recent December-quarter announcements by major Japanese banks failed to surprise us. Our forecasts and fair value estimates are unchanged: JPY 920 for Mitsubishi UFJ Financial Group, or MUFG; JPY 6,050 for Sumitomo Mitsui Financial Group, or SMFG; JPY 1,870 for Mizuho Financial Group; JPY 5,250 for Sumitomo Mitsui Trust Holdings, or SMTH; and JPY 680 for Resona Holdings. We consider all these stocks fairly valued, following a 28% rise in the TOPIX Banks Index over the past three months.

We now forecast Japanese banks’ domestic loan interest rates to rise by 1 basis point per year, versus our prior forecast of flat loan interest rates, based on the greater probability of higher policy rates from the Bank of Japan. As a result of slightly higher future forecast earnings from this assumption change, we have raised our fair value estimates for the three Japanese megabanks by 6%-7%: to JPY 920 for Mitsubishi UFJ Financial Group, to JPY 6,050 for Sumitomo Mitsui Financial Group, and to JPY 1,870 for Mizuho Financial Group. Our fair value estimate for Resona, which has greater exposure to domestic net interest income than the megabanks, rises 15% to JPY 680, and our fair value estimate for Sumitomo Mitsui Trust Holdings, which has less exposure to net interest income, rises 2% to JPY 5,250. Our fair value estimate for Japan Post Bank, which hardly makes loans, is unchanged at JPY 900. Based on an exchange-rate assumption of JPY 130/$1, our fair value estimates rise 7% to $7.08 for MUFG’s ADRs and to $2.88 for Mizuho’s ADRs.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot expand international lending to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

We update our forecasts for Japanese banks following their interim audited financials (yuho filings), which have information breaking down domestic and overseas interest income and loan amounts not included in quarterly earnings.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot expand international lending to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

We maintain our fair value estimates for Sumitomo Mitsui Financial Group, or SMFG, Mizuho Financial Group, Sumitomo Mitsui Trust Holdings, or SMTH, and Resona Holdings after they reported results for the April-June quarter. We also maintain our fair value estimate for Mitsubishi UFJ Financial Group, or MUFG, which won’t report its results until Tuesday, but its bottom-line figure was previewed ahead of the company announcement by Japan’s Nikkei newspaper on Saturday. There is: 24% upside from Friday’s closing price for SMFG based on our fair value estimate of 0.57 times book; 18% upside for SMTH based on our fair value estimate of 0.70 times book; 15% upside for MUFG based on our fair value estimate of 0.64 times book; 11% upside for Mizuho based on our fair value estimate of 0.50 times book; and just 3% upside for Resona based on our fair value estimate of 0.53 times book, making SMFG and SMTH our top picks, followed by MUFG.

With the bad-loan problems for which they were once infamous now two decades in the past, Japanese bank shares have lagged at low valuations for many years due mainly to a single problem: the country's superlow and seemingly ever-declining interest rates. We think hopes for a future V-shaped reflationary rebound have long dissipated.